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3 Stocks for Warren Buffett Fans

By Tyler Crowe, Keith Speights, and Neha Chamaria - Updated Apr 10, 2018 at 8:43AM

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Fans of Buffett can learn a few things looking at his portfolio -- and pick up a few great stock ideas along the way.

If you are an investor and not a stock trader, then you have to be a fan of Warren Buffett. The man is walking proof that buy-and-hold investing will never go out of style, no matter how many Wall Street talking heads declare it so. His ability to identify the best businesses possible and ride their ability to generate returns for decades has made him an investment icon, and perhaps one of the most respected billionaires on the planet (a group of people that aren't always in people's good graces).

So, in the spirit of Warren Buffett's investing acumen, we asked three of our investing contributors to each highlight a stock they see as one that fans of Buffett will find compelling. Here's why they picked Seritage Growth Properties (SRG -2.80%), Mastercard (MA -1.60%), and Visa (V -1.43%).

Warren Buffett at annual Berkshire Meeting.

Image source: The Motley Fool.

A stock Buffett definitely likes

Keith Speights (Seritage Growth Properties): Warren Buffett's personal fortune is primarily invested in Berkshire Hathaway, just as you would expect. But he also owns a handful of other stocks. One of them is Seritage Growth Properties.

The real estate investment trust (REIT) was spun off from Sears Holdings (NASDAQ: SHLD) in 2015. Most of Seritage's properties are still leased to Sears. That could cause concerns, since Sears continues to shut down many of its stores. However, Buffett bought a big stake in Seritage with full knowledge of Sears' precarious position.

What was the Oracle of Omaha thinking? He knew what Seritage's end game was. The REIT has done a great job of leasing former Sears properties to new tenants, including prominent theater chains, restaurants, and retailers. Even better, the new leases are much more profitable. Seritage releases the properties at an average multiple of 4.1 times the previous rent charged to Sears. The company is on track to generate roughly the same amount of rent from newer tenants as it does from Sears properties by the end of next year. 

Seritage already pays out a nice dividend, with a current yield of nearly 3%. As Seritage converts more of its properties from Sears to other higher-paying tenants, its profits should grow nicely, driving the dividend higher. If Sears goes bankrupt, it would hurt Seritage. But, like Buffett, I suspect the long-term prospects for the REIT are good. 

Invest in an economic moat, like Buffett

Neha Chamaria (Mastercard): As a Warren Buffett fan, you couldn't do better than investing in companies with an "economic moat," an idea coined and followed diligently by the Oracle of Omaha himself. What's important to understand is that while many companies may boast a competitive advantage, it should be big enough to continue to steer the company to growth in an ever-changing business environment.

One such moat is the network effect, where the value of a product or a service grows as the number of users rises. Not surprisingly, Berkshire Hathaway owns shares of payments processing giant Mastercard, a company with the network effect at the core of its business.

Each time someone swipes a Mastercard co-branded card anywhere in the world, the company earns a fee along with a percentage of the global transaction volumes. As more customers switch to the convenience of cashless payments, more merchants accept cards, and more banks issue them, thereby adding value to Mastercard through the network.

As impressive as Mastercard's past operational performance is, the future looks equally promising thanks to the global e-commerce digital push especially in cash-driven economies like India. Mastercard is aggressively strengthening its foothold in India and other high-potential markets. In recent years, Mastercard has steadily grown its sales, net income, and cash flows, generated operating margin of above 50%, and earned more than 30% returns on invested capital. With the company also adopting emerging technologies like artificial intelligence to improve and secure its payments platform, I strongly believe Mastercard will continue to grow manifold in coming years and remain a Buffett favorite.

Don't be afraid to double down on a great industry

Tyler Crowe (Visa): If you look up and down Berkshire's portfolio, you will find a lot of businesses in the same industry. Five of the top 12 holdings are banks, all four of the largest airlines, and multiple consumer goods companies. This goes to show that investors don't need to pick that one stock to act as your only exposure to an industry. If an industry is chock-full of great businesses, why not own all of them?

So, just like Buffett's portfolio of multiple companies in the same industry, I'm going to pick a stock in the same industry as Neha and say Visa. 

Visa shares many of the same competitive advantages and business qualities that Mastercard does. It acts as an intermediary for payments and takes that small percentage cut of each transaction, which translates into a high-margin, high-return business. When you compare the two face to face, though, you could argue that Visa has a leg up on Mastercard with an even larger card and merchant count globally. According to the company's most recent analyst day presentation, there are 44 million merchants worldwide that accept Visa-backed cards, and more than 3 billion cards worldwide are either Visa or Visa co-branded cards. 

As the world transitions away from cash -- a transition Visa is actively helping businesses make -- Visa is going to be a major beneficiary. Between e-commerce, peer-to-peer payments, business-to-business transactions, or government payment services, there are tens of trillions in transactions every year that Visa is looking to be a part of. Considering how lucrative it has been for the company to be a transaction intermediary thus far, it's not hard to see why investors like Buffett are willing to double down on an industry like this.

Keith Speights has no position in any of the stocks mentioned. Neha Chamaria has no position in any of the stocks mentioned. Tyler Crowe owns shares of Berkshire Hathaway (B shares) and Visa. The Motley Fool owns shares of and recommends Berkshire Hathaway (B shares), Mastercard, and Visa. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Visa Inc. Stock Quote
Visa Inc.
$210.26 (-1.43%) $-3.06
Mastercard Incorporated Stock Quote
Mastercard Incorporated
$346.54 (-1.60%) $-5.62
Seritage Growth Properties Stock Quote
Seritage Growth Properties
$11.82 (-2.80%) $0.34

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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